Morgan Stanley: Resurgent Greenback To Keep Rallying Into Next Year

We believe the USD will remain supported throughout the remainder of the year and into early 2012. Indeed, a combination of global deleveraging and position unwinding, in both DM and EM, will work to the USD’s favour, in our view.

Global position unwind could benefit USD. Our analysis of portfolio flows is consistent with the assumption that the USD has been the funding tool of choice over the past couple of years, both for investment in DM and EM. Hence, a global position unwinding would benefit the USD, even given that positioning is lighter than in 2008. We have seen this over the past month, with the USD rallying 5.5% in trade-weighted terms.

Repatriation – another possible USD positive. It is not just the international investor flows that are likely to drive the USD. US investors have bought a net USD370bn of foreign securities since March 2009. The US investor tends to be pro-cyclical, suggesting repatriation is another potential source of USD support.